How Burger King Fed Storm-Ravaged Puerto Rico, and Made a Killing

18 May 2018

by Seth Brumby, Javier Balmaceda, and Xavira Neggers Crescioni

Ana Isabel Valle stumbled out of her house at dawn’s break on September 21, the day after Hurricane Maria devastated her Hato Rey, San Juan neighborhood. As Valle walked to the nearest main street, Domenech Avenue, she began a search for the most basic necessity: food.

Every path was beaten; every road congested with felled trees, zinc roofs, and shredded storm detritus. But some 15 minutes later Valle was sitting at the only open restaurant in sight – a very crowded Burger King – devouring a warm egg sandwich and gulping down freshly brewed coffee and orange juice.

Unbeknownst to Valle at the time, the moment she found comfort in a hot meal was no accident. Caribbean Restaurants, the owner of the establishment and the master franchisee of Burger King in Puerto Rico, had been fine-tuning its disaster plan with military precision over the span of a decade. Armed with a vertically integrated business model, and strong supplier relationships, the company was able to nimbly turn its empire from purveyor of fast food to provider of the only food available for thousands of desperate residents.

“That was my first hot meal after Hurricane Maria and quite frankly, it was glorious,” said Valle, who less than 24 hours before sat barricaded in her home alongside a friend and her cat, peering nervously through a window as the worst storm in 90 years in the region battered the island with blistering, 155 mph winds.

Before contractors with the Federal Emergency Management Agency (FEMA) – the government agency tasked with “helping people before, during, and after disasters” – served their first plates, Burger King had already served two million meals in Puerto Rico, said Caribbean Restaurants CEO Aniceto Solares.

“Everyone has a plan until they get punched in the face,” Solares said.

Unfortunately for Puerto Rico, punches have landed on several fronts. Complicating the island’s ability to recover from disaster is the challenge of dealing with a simultaneous financial restructuring. The Commonwealth of Puerto Rico and its government institutions have defaulted on principal debt of more than $2.5bn since 2015. The island is now attempting to cut its liabilities while growing its economy under the auspice of the Puerto Rico Oversight Management and Economic Stability Act (PROMESA).

Congress included Puerto Rico in legislation to provide hurricane recovery capital across the country. But the island’s restructuring, unfolding within dozens of lawsuits slogging their way through the federal court system, has slowed the disbursement of its share.

If Puerto Rico’s bankruptcy cast adrift many businesses, then Maria drowned a lot of what remained. And for the individuals and families that relied on the government and the local economy to sustain basic living conditions after Maria, Caribbean Restaurants held out a lifeline.

Port in the storm

The National Oceanic and Atmospheric Administration called the 2017 hurricane season an “extremely active” one, and an upgrade from 2016, which was “above normal.” After Hurricane Harvey in August spun above Houston dropping so much rain that the earth’s crust sank three centimeters, Hurricane Irma
destroyed much of the Virgin Islands and Dominica before whipping western Florida as the state’s first Category 4 in over 10 years. Then came Maria – the strongest storm to hit Puerto Rico since 1928.

Both Texas and Florida suffered billions in damage. But for their residents, returning to “normal” happened quickly. The two states don’t face the same logistical challenges bringing in commodities and equipment as Puerto Rico, said Brigadier General José Reyes, who coordinated relief efforts between the Puerto Rico National Guard and US Armed Forces.

When Hurricane Harvey entered Texas, it only affected certain big cities, and relief and logistical support could easily traverse the nearby unaffected areas, Reyes said. The same thing with Florida. But Puerto Rico is in the middle of a “very, very big ocean,” as President Donald Trump observed in the days after Maria.

During the 16th century, the name ‘Puerto Rico’ referred to the port in what would eventually become San Juan. The appellation later spread to encompass the entire island. The association of an entire island with a singular port acquired a perverse significance after Maria. For months, piles of containers sat idle at the Port of San Juan, choking the rest of the commonwealth from vital supplies.

The bottleneck at the ports radiated outward. The main culprits were disaster relief priorities and mainland donations. Cargo in San Juan's port jumped by 145%-150% in the 90 days after Hurricane Maria compared to the same period the previous year, reported the Puerto Rico Shippers Association. But a lack of chassis to transport cargo out of the port jammed the system and resulted in cargo sitting in the port rather than being disseminated, said one maritime executive.

“All that cargo [relief aid] did was to create congestion at the docking piers,” the executive said.

Containers sit stacked in the Port of San Juan following Hurricane Maria. Source: Susana Bianchi

FEMA prioritized its own needs at the San Juan port, which in turn interrupted the cargo flow to the private sector, said Carlos J. Moral, Caribbean Restaurants’ president. To be sure, those needs included supplying hospitals and emergency care, and a focus on the most vulnerable on the island. But as recently as January, the private sector was still recovering from the bottleneck.

The National Guard treated the deployment of supplies at the port in the same way that it would a port in a combat scenario, said Reyes. In coordination with FEMA, the National Guard established ten regional sustainment areas, each managed by the Guard and that’s where and how the municipalities received their supplies, Reyes said.

But the National Guard also had to work around the gridlock in San Juan. It rerouted ships that had supplies to rebuild the island’s grid through Ponce on the southern coast, said Reyes. This required about 60,000 electrical poles and over 6,000 miles of cables, among many other pieces of equipment, he said.

“We opened [the port at] Ponce to get all of that so as to not interfere with the rest of the economy and other products that were coming in. That was the rationale for using Ponce instead of San Juan. We didn’t want to clog San Juan,” Reyes said.

Second responders were first

The scarcity of essentials was as much human as it was material. The absence of qualified personnel was particularly crippling at none other than Puerto Rico’s emergency management agency—usually tasked with leading emergency responses—which had to delegate its primary authority to local and stateside troops and other government officials.

“By the book, Puerto Rico’s emergency management agency should be the lead for these operations while FEMA, the National Guard, and the Army serve in supporting roles. But that was not the case [after Maria],” said Reyes. “The governor tasked us to take the lead as he provided directives on how to proceed.”

In the mix were also nonprofit organizations like World Central Kitchen that helped feed tens of thousands of Puerto Ricans – their roles all the more heightened by the lack of principal responders.

During storm preparation the National Guard initially focused on details related to soldier organization and satellite-based communication, Reyes said. The Guard kept a small, quick-reaction force called “the governor’s package” for any immediate response during the hurricane’s passage, the general said.
After ensuring their families were well protected the soldiers were to report immediately after the storm to one of the 23 armories spread over the island’s 78 municipalities. Emergency responders cannot centralize their management; they have to rely on those at the local level, Reyes added.

“Restaurants are ‘second responders,’” said Chris Muller, a PhD at the School of Hospitality Administration at Boston University with a focus on multi-unit restaurant management. “When the [1995] Oklahoma City bombing happened, the Oklahoma Restaurant Association cancelled a convention four blocks from the building and turned it into a meals kitchen. It served 30,000 meals over the next few days.”

“Insurance companies might require a disaster plan,” said Muller. “But I’m not sure this is something trained for universally. That doesn’t mean that [restaurants] aren’t concerned about it … but no restaurant could plan for what happened in Puerto Rico,” considering the historic nature of the destruction, he said.

Maria forced the closure of approximately 2,000 of the 5,000 restaurants (both legal and illegal) across the island, estimated Jose Salvatella, executive vice president of Grupo Colón Gerena and president of the Puerto Rico Restaurant Association.

Gadiel Lebron, executive director of the Puerto Rico Restaurant Association added, “The problem is that there are some restaurants that won’t reopen, but we don’t have certainty yet of how many won’t reopen officially, and how many new businesses will open during the course of the year.”

The restaurant industry in Puerto Rico accounted for roughly $2.1bn of the island’s $70bn in Gross National Product in 2016, according to a preliminary analysis on the website for the now-liquidating Government Development Bank for Puerto Rico. More up-to-date numbers for the island’s finances and obligations are notoriously hard to find, much less verify.

A big focus for any business after a disaster is whether it can hold inventory. This requires refrigeration, climate control and power. A proper risk analysis should include an assessment of key employees, the availability of fuel, diesel fuel, and whether current infrastructure, like an HVAC, needs an upgrade, said Brian Connors, an assistant professor at the College of Hospitality Management at Johnson & Wales University. After that, it’s all about communication: know what the procedures are and have action plans.

Preparing for a whopper

For Caribbean Restaurants, the call to action was rooted in similar principles and backed strongly by the company’s two-inch-thick proprietary disaster handbook and its commitment to spending $50k-$100k annually on upkeep and training over the past ten years, said CEO Solares.

Years of meticulous planning meant that by September 24, a mere 96 hours after Maria hit, Caribbean Restaurants had opened nearly two-thirds of its 173 Burger King locations, said Moral. The chain actually “had to stop opening restaurants because our suppliers couldn’t keep up,” Moral added.

Though management demurred on some specifics contained in the preparedness plan, they did provide Debtwire Investigations with a sketch of key elements that drove their response.

For starters, “the first ten pages [of the disaster handbook] are about taking care of families. You can't work if you haven't taken care of your family,” Solares said.

Akin to a protocol Reyes describes for the National Guard, Caribbean Restaurants divided its Puerto Rican operations into 24 centers, or mini bureaus, helmed by a district manager charged with executing on the disaster plan while connecting with corporate leadership and vendors via satellite phones. Solares learned the importance of satellite phones after watching the response to the 7.0 magnitude earthquake that hit Haiti in 2010.

“One of the first things we took into account for this new manual is that telecommunication towers will collapse during these kinds of emergencies,” said Solares. “Here in Puerto Rico nobody had really considered this … and if you don’t have visibility, it’s impossible to manage anything.”

Satellite phones, or satphones, are expensive and can be slow—depending on the distance a satellite is from earth. Satellites in a wider orbit can cover a broader swath of geography, but the distance, sometimes over 25,000 miles from earth, can delay reception. Solares and his crew used satphones that communicated with a low orbit of satellites roughly 500 miles from earth. Satphones also have a limited range of applications when compared to cell phones, and are difficult to use – but they can still transmit a call when an apparent act of God blows away terrestrial cell towers.

“I had lunch with a supplier who told me that those [satellite] phones don’t work,” said Moral. “But I told him that the real problem is learning how to use them. If people don’t practice, they’re going to make mistakes.”

It’s one thing to have supplies; it’s another to know how to use them. And that’s where the training kicks in. Caribbean Restaurants scheduled monthly training sessions with the 12 executives and managers that had the satphones prior to Maria (the company now has 36.) It was established practice among executives to schedule a month Friday call at 11am to test satellite equipment to make sure everyone knew how to use the phones.

“When we learned that Hurricane Maria was on its way, we intensified the drills,” said Moral. “Every day, on every odd hour from 7am to 9pm, our team would go out to a place with proper signal and generate calls to each other.”

Solares set an alarm clock that would go off every two hours, “so for those of us here at the headquarters, we would grab our phones and test them to make sure we could communicate with the rest of the team around the island. And this is the same protocol we followed after the hurricane struck,” he said.

“You have to have that culture, that discipline, that commitment to flush thousands of dollars every year [for insurance purposes] because in the end it’s not waste, it’s an investment,” Solares said.

While the satphone system served the restaurant chain well, the National Guard was not as lucky. The Guard supplied leadership with satphones ahead of Maria’s landfall, Brigadier General Reyes said, but largely they failed. Maybe one or two succeeded but for the most part there was no communication at all for the first 24 hours after the storm, he said.

Keeping it in-house

The disaster plan for Caribbean Restaurants is, in many ways, an extension of its business model. An in-house distribution framework, coupled with decentralized decision-making in use at dozens of command-style centers, made it possible for individual restaurants to respond to local conditions and move inventory across the devastated region. This approach allowed regional managers to expedite store openings, which became critical for people who lived outside of major metropolitan areas.

“When we bought it in 2004, Caribbean Restaurants had its own distribution,” said David Pittaway, a senior managing director at Castle Harlan. “It was a competitive advantage. We saved 2-3 points of margin by not paying someone else.”

The distribution network arguably saved the business too, as well as many people cut off from relief supplies that took weeks to reach them. Caribbean Restaurants gave away thousands of meals for free in the first few weeks after the storm because no one could withdraw cash, much less transact with credit cards. Nothing was open. There was no power.

“We had infrastructure and preparedness our competitors did not,” said Pittaway. “People couldn't cook nor store food at home, we had air conditioning and hot meals … As a result, sales were enormously increased.”

The company’s 173 Burger Kings are supplied by a company-owned warehouse and two other third-party warehouses leased every summer specifically to house additional stock for hurricane season. One of those third-party storage facilities suffered extensive damages and led to the loss of a great many potatoes. However, it was the main warehouse that proved most integral to the company’s ability to resume operations in the wake of the Maria.

On the contrary, companies like Grupo Colón Gerena faced significant complications stocking the 112 restaurants it operates on the island, according to Salvatella, the group’s executive vice president.

A lack of satellite phones and shipping containers were a particular source of headaches for Grupo Colón Gerena. The company didn’t decide to purchase satphones until immediately after the hurricane, to aid its efforts to communicate with personnel across the island as well as with suppliers, Salvatella said.

Much like Caribbean Restaurants, Grupo Colón Gerena also decided to regionalize its chain of command and held status meetings every morning and afternoon. Yet when it came to the lack of shipping containers at ports of origin—thanks to the groundswell of hurricane relief efforts—there was little to be done.

“Due to the high demand [of shipments] and FEMA, they [the shipping companies] have been short on equipment,” said Salvatella. “And I’m not referring to just food, I’m talking about the whole retail industry in Puerto Rico.”

As such, while much of the island’s food suppliers, including grocery stores, were hamstrung by their need to receive goods through the clogged Port of San Juan, Caribbean Restaurant’s integrated warehouse was operational and fully under its control.

Further hampering most of the island’s eateries and grocery stores was Puerto Rico’s tangible personal property tax—or a tax on inventory—which led businesses to maintain the bare minimum of supplies. That tax means that supermarkets don’t stockpile goods anymore and instead prefer to have them delivered on an as-needed basis, said the maritime executive who declined to go on the record. Only ten US states have a tangible personal property tax applicable to business inventory, according to the Tax Foundation.

Empty shelves in a San Juan supermarket. Source: Susana Bianchi

For its part, the Caribbean Restaurants disaster prep called for it to ignore the tax implications and stock up on inventory before Maria and all other major storms threatening the island. But despite its preparations for hurricanes Irma and Maria and its in-house distribution, Caribbean Restaurants eventually had to deal with the bottleneck at the Port Of San Juan, acknowledged CEO Solares.

“Some products we had a month’s worth of inventory; some products last only ten days,” he said.

The Empire Strikes Back

While maintaining and delivering goods to restaurants was one challenge, having the power supply to store food and cook it was yet another. But 20 years ago, Caribbean Restaurants made a fateful decision to convert to propane back-up generators from diesel, largely because it already fired its grills with propane gas.

Unlike other fast food restaurants that use heating trays or skillets, Burger King flame-broils its patties, and markets its menu that way too. Because it already used propane to cook food, the switch to propane from diesel to power the restaurants during emergencies made sense.

“Almost 90% of the generators run on propane,” said Solares. “We have only 15 restaurants with generators that run on diesel.”

Having inventory readily available meant Caribbean Restaurants was able to rely on an experienced network of drivers—all of whom stayed and worked through the storm—and an internal fleet of 25 trucks to deliver product to its stores. The trucks also benefited from a company owned 10-day supply of diesel that was supplemented with fuel shipments from longtime supplier Empire Gas.

Empire Gas is a 50-year old business and the largest supplier of propane gas in Puerto Rico. Its biggest customer is Caribbean Restaurants.

“In the case of [Caribbean Restaurants], a big reason they were able to do what they did was that we paid special attention to the company,” said Ramon Gonzalez, patriarch of Empire Gas who runs the business with his son, Ramon Gonzalez, Jr. “They are one of our largest clients, so we went above and beyond to keep a steady supply of gas for them.”

Hurricane Maria made landfall at Yabucoa on the island’s south eastern shore. After Enron filed for bankruptcy in the early aughts, Empire Gas bought the bankrupt company’s gas terminal and cogeneration project at Barrio Tallaboa in Peñuelas, on the opposite side of the southern coast where the Rio Tallaboa meanders. That terminal, one of three it owns, has an emergency plant that can generate 1 megawatt of power for a refinery handling 24,000 metric tons of gas.

The employees at the Peñuelas terminal faced off against a 38-hour flood from Tallaboa on a 10-foot by 10-foot scaffold before Gonzalez Jr. arrived the following day from San Juan. Like Caribbean Restaurants, Empire Gas has its own distribution, its own containers, and its own fleet of trucks that can power on propane to distribute gas across 40 different stations throughout the island. That doesn’t include the 1,500 retail locations where customers can pick up 20-pound propane tanks.

Empire Gas sells about 80-90 million gallons of gas annually, or 7-8 million gallons monthly. It can store 12 million gallons which is enough for a two-month supply. “If all our terminals were blocked for some reason, we could still supply for an entire month and half before having to restock,” Gonzalez said.

The unfettered terminal at Barrio Tallaboa gave Empire Gas the freedom to carry on despite all the distribution issues emanating from San Juan. Empire opened its terminal just one day after the hurricane and began distributing liquefied petroleum gas (LPG) immediately, Gonzalez said (Propane and butane are types of LPG, and are distinct from liquefied natural gas, which is methane).

“After the hurricane, we were moving 20-pound tanks like crazy,” said Gonzalez. “People would go all the way to the bottling plants to get them [as opposed to waiting for the tanks to get to the stores]. “We sold 20,000 of these tanks—outright sales, not exchanges—in just a month and a half. We had to ask for loads and loads of these tanks to make sure we could properly supply all 1,500 distribution points.”

Silver linings playbook

Maria’s howling gales were a windfall for Caribbean Restaurants’ performance. The company’s martial wisdom fed tens of thousands of people while igniting earnings ahead of a critical time in its business cycle.

If there is one takeaway for its owners, management, employees and customers as Puerto Rico stares down another hurricane season beginning in a few short weeks, it’s that disaster planning can be good business. EBITDA—a measure of earnings and cash flow critical for lenders—increased almost 30% year-over-year for the period between May and December 2017, said two investors to the company. In October 2017 alone, EBITDA skyrocketed 129% compared to the prior year, investors said.

Burger King locations in Puerto Rico. Source: Caribbean Restaurants

And while the earnings boost is good news amid the swirl of negative headlines about Puerto Rico, the company’s biggest financial test may be yet to come. Its $190m in debt due next year represents an exceedingly near-term maturity in the world of corporate debt, where healthy companies typically refinance several years ahead of due dates.

Leveraged loan investors sit on the more conservative side of the investing spectrum, and one of their top investing criteria is evidence of regular cash flows to provide assurance that interest and maturities will be paid on time. As such, Caribbean Restaurants’ position serving customers on an island in economic collapse could be complicated.

While the management team at Caribbean Restaurants and Castle Harlan declined to comment about the company’s financial performance, they did acknowledge that roughly $190m in corporate debt comes due in 2019. The company expects to refinance the debt in the normal course of business, said Castle Harlan’s Pittaway.

What’s not normal in the course of business is the length of Castle Harlan’s 14-year investment in Caribbean Restaurants. The time horizon for a private equity investment is obviously shorter than the 14 years, acknowledged Pittaway.

Castle Harlan’s most recent attempt to sell Caribbean Restaurants began in 2012, right as Puerto Rico’s gathering fiscal problems began setting off alarm bells in the capital markets. Puerto Rico’s more salient financial problems initially manifested themselves in the Puerto Rico Electric Power Authority (PREPA).

“In 2012, PREPA had significant problems with the price of oil increasing,” said Pittaway. “It paralyzed the economy. The sale process sputtered so we refinanced at that time.”

Six years later, efforts to sell the company remain on hiatus. Castle Harlan might revisit an exit strategy in three or four years. But for now, the private equity firm is biding its time until it sees signs of recovery in Puerto Rico’s economy, said Pittaway. And with any luck, that turnaround might happen as the island rebuilds following Maria’s devastation.

Meanwhile, the financial outperformance following Maria gives management and shareholders the wind at their backs as they negotiate a refinancing with lenders.

Looking ahead, Caribbean Restaurants plans an expansion in the foundering economy and will continue its disaster preparedness as the next unrelenting hurricane season approaches. As for its disaster manual, will Caribbean Restaurants disseminate it for the common good – for those restaurants that provide coffee to people waiting in three-hour lines, to those families lacking a valuable connection in food distribution, or maybe even to FEMA to increase their response time, or at least provide it with a little more discretion when selecting its subcontractors?